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REPORT ON EXAMINATION

OF THE

ERIE AND NIAGARA INSURANCE ASSOCIATION

AS OF

DECEMBER 31, 2003 DATE OF REPORT: AUGUST 12, 2005 EXAMINER: WARREN YOUNGS

Table of Contents

Page No.

1. Scope of examination 2

2. Description of Company 2

A. Management 3 B. Territory and plan of operation 5 C. Reinsurance 6 D. Holding company system 8 E. Significant operating ratios 10 F. Abandoned property 10 G. Real Estate: Arrangement with Industrial Development Agency 11 H. Accounts and Records 12

3. Financial Statements 13

A. Balance sheet 13 B. Underwriting and investment exhibit 15

4. Losses 17

5. Loss adjustment expenses 17

6. Market Conduct Activities 17

7. Compliance with prior report on examination 20

8. Summary of comments and recommendations 22

http://www.ins.state.ny.us

STATE OF NEW YORK

INSURANCE DEPARTMENT ONE COMMERCE PLAZA

ALBANY, NEW YORK 12257

George E. Pataki Howard Mills Governor Superintendent August 12, 2005 Honorable Howard Mills Superintendent of Insurance Albany, New York 12257

Pursuant to the requirements of the New York Insurance Law, and in compliance with the

instructions contained in Appointment Number 22218, dated May 3, 2004, attached hereto, I

have made an examination into the condition and affairs of the Erie and Niagara Insurance

Association as of December 31, 2003 and submit the following report thereon.

The examination was conducted at the Company’s home office located at 8800 Sheridan

Drive, Williamsville, New York 14221.

Wherever the designations “the Company” or “ENIA” appear herein without

qualification, they should be understood to indicate the Erie and Niagara Insurance Association.

Wherever the term “Department” appears herein without qualification, it should be

understood to mean the New York Insurance Department.

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1. SCOPE OF EXAMINATION

The previous examination was conducted as of December 31, 1999. This examination

covered the four-year period from January 1, 2000 through December 31, 2003, and was limited

in its scope to a review or audit of only those balance sheet items considered by this Department

to require analysis, verification or description, including: invested assets, inter-company

balances, loss and loss adjustment expense reserves and the provision for reinsurance. The

examination included a review of income, disbursements and company records deemed

necessary to accomplish such analysis or verification and utilized, to the extent considered

appropriate, work performed by the Company’s independent public accountants.

A review was also made to ascertain what action was taken by the Company with regard

to comments and recommendations contained in the prior report on examination.

This report on examination is confined to financial statements and comments on those

matters, which involve departures from laws, regulations or rules, or which are deemed to

require explanation or description.

2. DESCRIPTION OF COMPANY

The Company was organized on January 1, 1875 as the Erie and Niagara Farmers’

Insurance Association. On June 7, 1887 the Company was incorporated for the purpose of

transacting business as an assessment co-operative fire insurance company in Erie and Niagara

counties of New York State.

In 1958, a merger was effected with the Ashford Mutual Fire Insurance Company of

Delevan, New York. Erie and Niagara Farmers’ Insurance Association was the surviving

corporation.

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The Company’s name was changed by authorization of this Department on April 18,

1961, to the Erie and Niagara Insurance Association.

On November 1, 1982, a merger was effected with the Amherst and Clarence Insurance

Company, of Williamsville, New York. On January 1, 1983, a merger was effected with the

Cattaraugus and Allegany County Patron’s Fire Relief Association, of Randolph, New York. In

both instances, the Erie and Niagara Insurance Association was the surviving corporation.

A. Management

Pursuant to the Company’s charter and by-laws, management of the Company is vested in a

board of directors consisting of not less than nine nor more than fifteen members. As of the

examination date, the board of directors was comprised of eleven members.

At least four board meetings were held each year for the period under examination, thereby

complying with Section 6624(b) of the New York Insurance Law.

The directors as of December 31, 2003 were as follows:

Director Principal Business Affiliation

Leonard Joseph Almquist Buffalo, NY

Certified Public Accountant; Vice Chairman of the board of ENIA

Gordon Paul Assad East Aurora, NY

President/CEO of ENIA; Chairman of the board & President of Cherry Valley Cooperative Insurance Company; Director and President of E & N Financial Services, Inc.

James Walter Fulmer LeRoy, NY

President of Tompkins Trustco, Inc.; Director of Cherry Valley Cooperative Insurance Company

Robert Milton Hoover Orchard Park, NY

Senior Vice President of Information Technology and Chief Information Officer of Independent Health

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Director Principal Business Affiliation

Robert Harmon Lowe Geneseo, NY

Vice President/Secretary of ENIA; Director and Vice President/Secretary of Cherry Valley Cooperative Insurance Company; Director and Vice President/Secretary of E & N Financial Services, Inc.

Benjamin Charles Mancuso Batavia, NY

Chairman of the board of ENIA; Director of Cherry Valley Cooperative Insurance Company

Maureen Jill Marshall Elba, NY

Owner and Vice President of Torrey Farms, Inc.

Russell Glenn Miller Arcade, NY

Owner of Plato Brook Farms

John Alan Noble Pavilion, NY

Owner of NobleHurst Farms; Director of Cherry Valley Cooperative Insurance Company

Erik Mo O’Neill Lockport, NY

Senior Vice President of Advest, Inc.

Linwood Dean Poelma East Amherst, NY

Vice President of M&T Bank

The minutes of all of the Board of Directors’ meetings and committees thereof held during

the examination period were reviewed. Such review indicated that all of the meetings were well

attended. Each of the directors had a satisfactory attendance record for the board meetings held.

Each of the director’s qualifications, as set forth in Article VII of the Company’s charter and

Article IV Section 1 of its by-laws, was reviewed and it appears that each director was duly

qualified.

At December 31, 2003, the officers of the Company were as follows: Chairman of the Board Benjamin Charles Mancuso Vice Chairman of the Board Leonard Joseph Almquist President/CEO Gordon Paul Assad

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Vice President & Secretary Robert Harmon Lowe Vice President & Treasurer Norman John Orlowski, Jr. Claims Manager Nelson Bernard Dahl

B. Territory and Plan of Operation

The Company is authorized to transact business within all the counties of the State of

New York, excluding the Counties of Bronx, Kings, New York, Queens and Richmond. The

Company writes only in New York State.

The following table shows the direct premiums written by the Company in New York for

the period under examination:

Calendar Year Direct Premiums Written (000’s)

2000 $24,412 2001 28,242 2002 33,317 2003 38,858

As of December 31, 2003, the Company was authorized to transact the kinds of insurance

as defined in the following numbered paragraphs of Section 1113(a) of the New York Insurance

Law:

Paragraph Kind of Insurance

4 Fire 5 Miscellaneous property 6 Water damage 7 Burglary and theft 8 Glass 9 Boiler and machinery

12 Collision 13 Personal injury liability 14 Property damage liability 15 Workers’ compensation and employers’ liability

(excluding workers’ compensation)

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Paragraph Kind of Insurance

19 Motor vehicle and aircraft physical damage (excluding aircraft physical damage)

20 Marine and inland marine (inland marine only)

The Company was also licensed as of December 31, 2003, to accept and cede reinsurance

as provided in Section 6606 of the Insurance Law of the State of New York.

It is noted that effective December 3, 2002 the Company added paragraph 9 “Boiler and

Machinery” to its license. That was the only change to the Company’s license since January 11,

1988.

Based upon the lines of business for which the Company is licensed, and pursuant to the

requirements of Articles 13 and 66 of the New York Insurance Law, the Company is required to

maintain a minimum surplus to policyholders in the amount of $100,000.

At December 31, 2003, the Company wrote insurance through independent agents. The

Company’s predominate lines of business are fire, farmowners multiple peril, homeowners

multiple peril and commercial multiple peril, which accounted for 19.16%, 18.64%, 22.86% and

38.28%, respectively, of the Company’s 2003 direct written business.

C. Reinsurance

The Company assumed no business during the examination period.

The examiner reviewed all ceded reinsurance contracts effected during the examination

period. These contracts, as amended, all contained the required standard clauses including

insolvency clauses meeting the requirements of Section 1308 of the New York Insurance Law.

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As of December 31, 2003 the Company had the following excess of loss reinsurance

program in place:

Property 3 layers $1,840,000 in excess of $160,000 each risk, each loss. The second and third layers have a maximum reinsurer liability limit for all risks involved in one occurrence as follows: Second--$225,000 and Third--$5,250,000. It is noted that the first layer is placed with an affiliate. See section 2(D) of the report for additional information.

Casualty 2 layers $1,325,000 in excess of $175,000 each occurrence.

The second and third layers of the property coverage and the two layers of the casualty coverage noted above are subject to an NBCR Terrorist Activity Aggregate Limit for all loss, cost or expense caused directly or indirectly by NBCR Terrorist Activity as follows: Second Property & First Casualty--$225,000 and Third Property and Second Casualty--$5,250,000 ultimate net loss in the aggregate for all occurrences each agreement year.

Property and Casualty Occurrence

In the event the property and casualty business covered under the second property layer and the first casualty layer noted above are both involved in the same loss, the Company retains only the first $175,000 of the combined ultimate net loss in respect of both classes, provided that respects property business, only one risk may be combined in the same occurrence. Such loss and the Company’s retention thereon shall be apportioned to each class in the same proportion that the Company’s ultimate net loss for each class bears to the Company’s combined ultimate net loss from both classes. The reinsurer shall reimburse the Company for the difference between the Company’s first $175,000 of ultimate net loss under each class and the Company’s pro rated retention on each class.

Casualty Clash $1,000,000 in excess of $1,500,000 each occurrence. The reinsurer’s liability for ultimate net loss from casualty business is further limited to the following NBCR Terrorist Activity Annual Aggregate Limit for all loss, cost or expense caused directly or indirectly by NBCR Terrorist Activity: $1,000,000 ultimate net loss in the aggregate for all occurrences each agreement year.

As of December 31, 2003, the Company also maintained catastrophe excess of loss

coverage on a per occurrence basis:

Property 100% in excess of $750,000.

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At December 31, 2003 the Company had a 100% quota share reinsurance treaty for

equipment breakdown coverage up to a limit of $25,000,000 on any one risk.

The Company also had in effect, as of the examination date, accident year aggregate

excess of loss coverage of $2,000,000 in excess of a 70.0% accident year loss ratio. In addition,

the Company maintained property facultative facilities for higher limit risks.

All of the Company’s cessions during the period under examination were to authorized

reinsurers.

Since the date of the prior examination, December 31, 1999, the Company increased its

net retention from $140,000 to $160,000 on its property business and from $150,000 to $175,000

on its casualty business.

D. Holding Company System

Cherry Valley Cooperative Insurance Company (“Cherry Valley”)

As of December 31, 2003, the Company was affiliated with the Cherry Valley

Cooperative Insurance Company, by virtue of common officers, directors and management.

The two insurers entered into a service agreement, effective July 2, 1990, whereby the

Company provides specified services to Cherry Valley.

The agreement further provides for expenses incurred and paid for by the Company in the

course of providing services under this agreement, to be allocated between the two companies in

a manner consistent with Department Regulation 30. This Department issued a letter of non-

objection relative to the implementation of the agreement on August 23, 1990.

The Company ceded business during the examination period, to its affiliate, the Cherry

Valley Cooperative Insurance Company. As of December 31, 2003, the property excess of loss

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contract provided for the assumption, on the part of Cherry Valley from Erie and Niagara, of

$15,000 in excess of $160,000 per risk, per occurrence.

It is noted that, as of December 31, 2003, the Company held $150,000 of Section 1307

Surplus Notes issued by Cherry Valley.

E & N Financial Services, Inc. (“E & N Financial”)

On May 5, 1995, this Department issued a non-exception letter to the organization of a

wholly owned subsidiary of the Company called E & N Financial Services, Inc. The purpose of

E & N Financial is to act as an insurance agency and service subsidiary for the Company. The

subsidiary is licensed by other insurance companies that offer insurance products not otherwise

available from ENIA.

Initially the Company purchased 100 shares of E & N Financial $.01 par common stock,

at $60 per share, for a total investment of $6,000. On November 3, 1997, this Department issued

a non-objection letter relative to the Company purchasing another 400 shares of E & N Financial

at $60 per share, for a total of $24,000. The Company’s total investment in E & N Financial as

of December 31, 2003 was $30,000.

E & N Financial is sited at the Company’s home office. An agreement was entered into

between the Company and the subsidiary on January 1, 1996 whereby the Company provides

specified management and operational services to E & N Financial. The agreement also

provides for operating expenses incurred and paid for by the Company in the course of providing

services under this agreement, to be allocated between the two companies in a manner consistent

with Department Regulation 30.

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E. Significant Operating Ratios

The following ratios have been computed as of December 31, 2003, based upon the

results of this examination:

Net premiums written in 2003 to Surplus as regards policyholders

1.03 to 1

Liabilities to liquid assets (cash and invested assets less investments in affiliates)

49.92%

Premiums in course of collection to Surplus as regards policyholders

2.63%

The above ratios fall within the benchmark ranges set forth in the Insurance Regulatory

Information System of the National Association of Insurance Commissioners.

The underwriting ratios presented below are on an earned-incurred basis and encompass the

four-year period covered by this examination:

Amounts Ratios Losses incurred $49,417,903 45.60% Loss expenses incurred 5,940,775 5.48% Other underwriting expenses incurred 48,500,457 44.75% Net underwriting gain (loss) 4,513,494 4.17% Premiums earned $108,372,629 100.00%

F. Abandoned Property

During the period covered by this examination, the Company filed reports with the state

comptroller that generally complied with the requirements of the New York Abandoned Property

Law.

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It is noted that the Company has written procedures related to the handling of unclaimed

funds.

G. Real Estate: Arrangement with Industrial Development Agency

On January 20, 1993, this Department granted approval for the Company to purchase a

parcel of land at a cost of $275,000, for use as a building site for a new home office. On March

2, 1993, the New York Insurance Department approved the Company spending $1,801,106 to

construct a new home office building. The March 2, 1993 Department approval letter noted that

the building construction was being accomplished through the auspices of the Clarence Industrial

Development Agency and that the Company had entered into a sale/leaseback arrangement with

that agency. Such arrangement is intended to provide tax benefits to the Company. The

Company funded the land purchase and the building construction.

The Company and the Town of Clarence, Erie County, Industrial Development Agency

(“IDA”) entered into a lease agreement dated as of March 1, 1993. The term of the lease is

March 1, 1993 to December 31, 2004, or such earlier date as the lease agreement may be

terminated as provided in such agreement.

On March 26, 1993, the Company executed a deed in favor of the IDA, granting it title to

ENIA’s home office property.

The lease agreement provides that upon expiration, or sooner termination, of the lease the

IDA will reconvey said leased premises and property to ENIA, by quit claim deed, for a purchase

price of $1.00 and any other amounts then due under the lease agreement.

The Company is obligated to make payments in lieu of taxes to the Town of Clarence, the

Clarence Central School District and the County of Erie during the term of the lease.

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H. Accounts and Records

i. Approval of Investments

Section 1411(a) of the New York Insurance Law states, in part, that “No domestic insurer

shall make any loan or investment … unless authorized or approved by its board of directors or a

committee thereof responsible for supervising or making such investment or loan. The

committee’s minutes shall be recorded and a report submitted to the board of directors at its next

meeting.”

During the review of the Company’s investments to determine if they were properly

approved, it was determined that the Company was not having its board approve all of its

investments. Thus, the Company was not complying with the requirements of Section 1411(a).

Therefore, it is recommended that the Company comply with the requirements of Section

1411(a) of the New York Insurance Law by having all of its investments authorized or approved

as indicated in such section.

ii. CPA Contracts

The Company’s CPA contracts for 2001, 2002 and 2003 did not meet all the

requirements of Department Regulation 118. After bringing such requirements to the attention

of Company management, they attempted to have the CPA firm modify the 2003 agreement, but

the revised agreement still did not comply with all the requirements of Regulation 118. Thus, it

is recommended that the Company ensure that its contracts with its CPA firm covering all future

audit years meet the requirements of Department Regulation 118.

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3. FINANCIAL STATEMENTS

A. Balance sheet

The following shows the assets, liabilities and surplus as regards policyholders as

determined by this examination as of December 31, 2003. This statement is the same as the

balance sheet filed by the Company. The figures included in these financial statements have

been rounded.

Non Admitted Net Admitted

Assets Assets Assets Assets Bonds $43,963,626 $ $43,963,626Common stocks 7,433,981 7,433,981Real Estate: Properties occupied by the Company 2,305,096 2,305,096Cash (25,503) (25,503)Short-term investments 6,405,324 6,405,324Other invested assets 150,000 150,000Investment income due and accrued 559,332 559,332Uncollected premiums and agents’ balances in the course of collection 1,093,577 178,190 915,387Deferred premiums, agents’ balances and installments booked but deferred and not yet due 5,152,865 5,152,865Reinsurance: Amounts recoverable from reinsurers 97,267 97,267Current federal and foreign income tax recoverable and interest thereon 74,308 74,308Net deferred tax asset 2,163,603 292,645 1,870,958Electronic data processing equipment and software 417,724 284,687 133,037Furniture and equipment 308,137 308,137 0Receivables from parent, subsidiaries and affiliates 8,790 8,790Other assets nonadmitted 410,153 410,153 0Aggregate write-ins for other than invested assets 49,349 _______ 49,349

Total assets $70,567,629 $1,473,812 $69,093,817

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Liabilities & Surplus Losses $8,425,291Loss adjustment expenses 1,605,304Commissions payable, contingent commissions and other similar charges

2,062,411

Other expenses (excluding taxes, licenses and fees) 1,334,984Taxes, licenses and fees (excluding federal and foreign income taxes) 31,393Unearned premiums 19,690,228Advance premiums 556,711Ceded reinsurance premiums payable (net of ceding commissions) 72,532Amounts withheld or retained by company for account of others 39,492Aggregate write-ins for liabilities 421,488 Total liabilities $34,239,834 Required surplus $ 100,000Unassigned funds (surplus) 34,753,983 Surplus as regards policyholders $34,853,983 Total liabilities and surplus as regards policyholders

$69,093,817

The Internal Revenue Service did not audit the Company’s federal income tax returns for

the years under examination. Audits covering subsequent tax years have yet to commence. The

examiner is unaware of any potential exposure of the Company to any further tax assessment and

no liability has been established herein relative to such contingency.

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B. Underwriting and Investment Exhibit

Surplus as regards policyholders increased by $9,699,300 during the four-year

examination period, January 1, 2000 to December 31, 2003, detailed as follows:

Statement of Income

Underwriting Income

Premiums earned $108,372,629

Losses incurred $49,417,903

Loss expenses incurred 5,940,775

Other underwriting expenses incurred 48,500,457

Total underwriting deductions 103,859,135

Net underwriting gain (loss) $4,513,494

Investment Income

Net investment income earned $9,307,776

Net realized capital gains or (losses) 320,678

Net investment gain or (loss) 9,628,454

Other Income

Net gain or (loss) from agents’ or premium balances charged off $(355,040)

Finance and service charges not included in premiums 1,397,263

Aggregate write-ins for miscellaneous income (107,445)

Total other income 934,778

Net income before federal income taxes $15,076,726

Federal income taxes incurred 4,905,000

Net income (loss) $10,171,726

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Capital and Surplus Account Surplus as regards policyholders, December 31, 1999, per prior report on examination $25,154,683 Gains in

Surplus Losses in Surplus

Net income or loss $10,171,726 $ 0 Net unrealized capital gains or (losses) 0 1,587,452

Change in net deferred income tax 713,790 0

Change in non-admitted assets 0 1,004,560

Cumulative effect of changes in accounting principles 1,405,796 _______0

Total gains and losses $12,291,312 $2,592,012

Net increase in surplus as regards policyholders 9,699,300

Surplus as regards policyholders, December 31, 2003 per report on examination $34,853,983

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4. LOSSES

The examination liability of $8,425,291 is the same as the amount reported by the

Company in its 2003 filed annual statement.

The Department’s analysis was conducted in accordance with generally accepted

actuarial principles and practices and was based on statistical information contained in the

Company’s internal records and in its filed annual statements. Such analysis indicated that the

Company’s loss reserves appear adequate as of December 31, 2003.

5. LOSS ADJUSTMENT EXPENSES

The examination liability of $1,605,304 is the same as the amount reported by the

Company in its 2003 filed annual statement.

The Department’s analysis was conducted in accordance with generally accepted

actuarial principles and practices and was based on statistical information contained in the

Company’s internal records and in its filed annual statements. Such analysis indicated that the

Company’s loss adjustment expense reserves appear adequate as of December 31, 2003.

6. MARKET CONDUCT ACTIVITIES

In the course of this examination, a review was made of the manner in which the

Company conducts its business practices and fulfills its contractual obligations to policyholders

and claimants.

The review was general in nature and is not to be construed to encompass the generally

more precise scope of a market conduct investigation.

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The general review was directed at practices of the Company in the following areas:

1) Sales and advertising

2) Underwriting

3) Rating

4) Treatment of policyholders and claimants

Except as noted below, no unfair practices were encountered.

Section 3245 of the New York Insurance Law

During the review of cancellation notices issued by the Company, it was found that the

Company cancelled personal lines policies in effect 60 days for other than the statutory reasons

put forth in Section 3425(c)(2) of the New York Insurance Law.

In correspondence dated January 17, 2005 the Company indicated that it would take

corrective action regarding this matter. Nevertheless, it is recommended that the Company

comply with Section 3425(c)(2) of the New York Insurance Law and only allow polices that

have been in effect 60 days to be canceled for one of the statutory reasons put forth in such

section. It is noted that a similar recommendation regarding compliance with Section 3425 of

the New York Insurance Law was included in the prior report; however, that recommendation

dealt with the non-renewal provisions of such section.

Section 6615 of the Insurance Law

During the review of the Company’s rating practices it was found that the Company was

not having its board of directors approve its rates of assessment.

Section 6615(a)(1) of the New York Insurance Law states, in part, that “Every

assessment corporation may, if so directed by its board of directors levy an assessment upon all

of its members …”

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In correspondence dated January 19, 2005 the Company indicated that it would take

corrective action regarding this matter. Nevertheless, it is recommended that the Company

comply with Section 6615(a)(1) of the New York Insurance Law and have its rates of assessment

approved by its board of directors.

Department Regulation 64

Department Regulation 64 Part 216.4(a) states, in part, that “Every insurer, upon

notification of a claim, shall, within 15 working days, acknowledge the receipt of such notice.

Such acknowledgment may be in writing. If an acknowledgment is made by other means, an

appropriate notation shall be made in the claim file of the insurer …” During the review of the

Company’s claim files it was found that in instances when an outside adjuster was utilized,

whether acknowledgement of the notice of claim within the required 15 day period took place

could not be determined from the information in the claim file. In correspondence dated January

19, 2005 the Company indicated that it would take corrective action regarding this matter.

Department Regulation 64 Part 216.11 states, in part, that “… All communications and

transactions, whether written or oral, emanating from or received by the insurer shall be dated by

the insurer …” During the review of the Company’s claim files it was found that some written

correspondence therein was not dated when received by the Company. In correspondence dated

January 6, 2005 the Company indicated that it would take corrective action regarding this matter.

While the Company indicated that it would take corrective action regarding the two

Regulation 64 issues noted above, it is nevertheless recommended that the Company comply

with the requirements of Department Regulation 64 Parts 216.4(a) and 216.11 regarding the

acknowledgement of notice of claim and the dating of all communications and transactions.

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7. COMPLIANCE WITH PRIOR REPORT ON EXAMINATION

The prior report contained comments and recommendations as follows: (page numbers

refer to the prior report on examination):

Item Page No.

A. Custodianship of Securities

Recommendation that the Company comply with Department Circular

Letter No. 2 (1977) and only allow its investments to be held under

custodial arrangements that meet the requirements put forth in the circular

letter.

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The Company has complied with this recommendation.

B. Undocumented Travel Expenses

Recommendation that the Company comply with Section 1217 of the New

York Insurance Law.

13

The Company has complied with this recommendation.

C. Fiduciary Responsibilities of Directors and Officers

Recommendation that the board of directors and the officers of the

Company remain mindful of their responsibilities to the Company and its

policyholders, as set forth in Sections 717 and 715 of the New York

Business Corporation Law and that the Company is directed to replace any

director and/or officer who cannot or does not fulfill his/her duties in good

faith and with that degree of care, which an ordinarily prudent person in a

like position would use under similar circumstances.

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Item Page No.

The Company has complied with this recommendation.

D. . Market Conduct Activities

i. Recommendation that the Company comply with all the provisions of

Section 3403 of the New York Insurance Law and Department Regulation

No. 96, henceforth.

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The Company has complied with this recommendation.

ii. Recommendation that the Company comply with all the provisions of

Sections 3425 and 3426 of the New York Insurance Law.

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The Company has not complied with the part of the recommendation

dealing with Section 3425. However, it is noted that the recommendation in

the prior report dealt with the non-renewal provisions of Section 3425 and the

recommendation in the current report deals with the cancellation provisions of

such section. See Section 6 of this report.

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8. SUMMARY OF COMMENTS AND RECOMMENDATIONS

The following is a summary of comments and recommendations made in the body of this

report:

Item Page No.

A. Accounts and Records

Approval of Investments

i. It is recommended that the Company comply with the requirements of

Section 1411(a) of the New York Insurance Law by having all of its

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investments authorized or approved as indicated in such section.

CPA Contracts

ii. It is recommended that the Company ensure that its contracts with its CPA

firm covering all future audit years meet the requirements of Department

Regulation 118.

12

B. Market Conduct Activities

i. It is recommended that the Company comply with Section 3425(c)(2) of

the New York Insurance Law and only allow polices that have been in

effect 60 days to be canceled for one of the statutory reasons put forth in

such section. It is noted that a similar recommendation regarding

compliance with Section 3425 of the New York Insurance Law was

included in the prior report, however, that recommendation dealt with the

non-renewal provisions of such section.

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Item Page No.

ii. It is recommended that the Company comply with Section 6615(a)(1) of

the New York Insurance Law and have its rates of assessment approved

by its board of directors.

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iii. It is recommended that the Company comply with the requirements of

Department Regulation 64 Parts 216.4(a) and 216.11 regarding the

acknowledgement of notice of claim and the dating of all communications

and transactions.

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